For insurance policies, a deductible is typically the amount that must be paid out of pocket before the insurer will pay out on an associated claim. The deductible is normally quoted as a fixed dollar amount and is a standard part of insurance policies. In the event of a loss, in some policies, the deductible must be paid by the insured, before the benefits of the policy are paid. In some policies, the amount due to the insured for a covered loss is reduced by the amount of the deductible, but there is no requirement that the insured pay the amount out of pocket before payment by the insurer. Typically, the higher the deductible, the lower the premium, and vice versa. For example, a policy with a yearly premium of $1000 may have a $500 deductible, a policy with a yearly premium of $1500 may have a $250 deductible, and so on. Depending on the policy, the deductible may apply per incident, per year or for the life of the policy. In a typical automobile insurance policy, a deductible will apply to claims arising from damage to or loss of the policy holder's vehicle without regard to fault.
Another type of deductible in the marketplace is the so-called disappearing or vanishing type deductible. The so-called disappearing type deductible is a formula deductible that decreases as the amount of loss increases or in the case of automobile policies, where the insured has no losses/accident. The disappearing deductible may eventually disappear completely over a period of years if the policyholder does not have any claims or losses.
A negative consequence of having a deductible is that many policyholders never report many smaller accidents, losses or claims as the bulk of the cost will be borne by the policyholder requiring a lump sum payment from the policyholder on their own behalf. For example, if a policyholder has a $600 loss and a $500 deductible, the policyholder will not be likely to report the claim as the policyholder would have to pay for most of the loss anyway and then also incur a potential negative rating from the insurer due to the loss. By way of further example, even if a policyholder were to have a $1000 loss with a $500 deductible policy, half of the loss would still have to be borne by the policyholder and thus the policyholder may still be incentivized not to report the claim.
Accordingly, it would be desirable to have a system that could provide policyholders with improved deductible choices including a policy with no deductible at all.